PATTI'S
NOVEMBER 12, 2008 9am to noon , and 2pm to 5pm.
Submitted by Patricia
Karnes
Note: This is my understanding of the meeting. There are also some notes from
the Audit Committee and Council meetings on Nov. 10th. I attended the Nov. 12th
meeting to make comments on cutting summer trash pick up in
MOOD OF THE EVENT: Mayor Sanders listened to two supporters of his budget cuts
(out of more than 50 opposing public speakers), after he introduced his
2010-2014 FIVE YEAR FINANCIAL OUTLOOK AND FISCAL YEAR 2009 BUDGET AMENDMENT
REPORT on pain and sacrifice. A petition with 300 signatures, protesting the
closure of Benjamin Library, was angrily thrust into Sanders' hands. Another
commented said he would rather live with the potholes than close recreation
centers. A suggestion was made to cut privatization costs as well.
Council- Elects and April Boling were invited, attended, but made no comment. DeMaio watched Channel 24 from home as he had the flu.
OVERVIEW: The Mayor said the next three years will challenge the idea that City
services can't be cut back over $87 million from a lean budget. This does not
include money the State might borrow from cities. Ms. Lewis, from the Mayor's
office, later added that the temporary cuts would be permanent for staff, and
subject to re-evaluation for facility closures depending on revenue/economy
over the next five years.
CITY'S ANNUAL REQUIRED CONTRIBUTION TO SDCERS
Goldstone reported SDCERS' $4.2 billion on June 30, 2008, was down to $3.78
billion on October 31, 2008.
He said the stock market's impact on annual City payments to SDCERS, will lag
two years, to Fiscal Year 2011, due to SDCERS' amortizations of gains/losses,
adjustments in DROP interest rates, changes in actuarial assumptions, etc.
The City paid SDCERS $161.7 million for FY 2008-2009 and expects to pay $166
million for FY 2009-2010.
While the stock market may recover sooner, the City's Annual Required
Contribution (ARC) for FY 2010-2011is expected to increase between a best case
scenario of $33 million (ARC = $199 million) and a worse case scenario of $70
million (ARC= $231 million).
In FY 2013-2014, worse case in Goldstone's presentation was an ARC of $291
million, and best case was an ARC of $223.8
(See page 17 in the Mayor's five year plan for the discussion, and page 18 for
a table of ARCs from 2009-2014.)
Cost of Preservation of Benefits (pensions over the IRS limit), not paid out of
SDCERS, was $1.227 million in 2008- 2009, according to a letter from Wescoe. Future estimates, from the Mayor's five year plan
on page 18, were $1.3 million in 2011 and $1.6 million in 2014.
Ms Lewis, from the Mayor's office, noted that the ARC and retiree healthcare
are on the list of eight significant areas.
Retiree Healthcare funding scenarios: $64.5 million in 2011, $72.4 million in
2012, $80.7 million in 2013, and $90 million in 2014. (See page 19 of the
Mayor's five year plan.
CURRENT ESTIMATED FUNDED RATIOS OF SDCERS ON A MARKET
VALUE BASIS
Mr. Esuchanko, the City's pension actuary, gave
SDCERS' October 31, 2008 funded ratio as 58% under Actuarial Accrued Liability
and 48% under Present Value of Benefits. His handout, of Nov 12, 2008, is
available from the City Clerk. Most of his numbers are below, arranged to fit
on this page.
Madaffer said that the public should expect peaks and
valleys in SDCERS funding, but as long as the City is managing the unfunded
liability, it is not a permanent thing., Aguirre said
the market was down another 4% or 400 points today and there was no end in
sight for the AIG bailout. Aguirre went on to note that SDCERS has done very
well in investment returns in the past. However he pointed out, in response to Madaffer, major companies are re-organizing, and that is
managing the problem.
The unfunded liability has basically doubled and investments are no longer
keeping up with the benefits that employees are accumulating, according to
Aguirre. Because of this, Aguirre said that he is changing his position and
recommending a re-organization of SDCERS in order to make a change in SDCERS'
investment policy and have a larger percent in more conservative investments.
He added that sooner is better than later.
The City is paying about $200 million a year in interest on the $2 billion
deficit, plus the normal costs for each employee in the Annual Required
Contribution or ARC, estimated Aguirre. He questioned if it was possible for
the City to continue paying this amount. Consider the ARC going up another $90
million in 15 years, he said. Ms. Lewis from the Mayor's Office had pointed out
earlier in the meeting that the City's budget deficit was being driven by escalating
pension costs.
Esuchanko's numbers, as I understand them:
Using Actuarial Accrued Liability (Entry Age Normal Basis)
65% Funded Ratio on June 30, 2005, $1.6 million was not funded (UAAL).
77% Funded Ratio on June 30, 2006, $1.2 million was not funded.
79% Funded Ratio on June 30, 2007, $1.2 million was not funded.
( SDCERS voted to change actuarial assumptions over
the last two years. They switched to market value from book value, dropped the
assumed rate of return from 8% to 7.75%, adjusted for retirees living longer
and pay raises for safety. The stock market started impacting SDCERS the last
fiscal year quarter of 2007-08, April-May-June.)
66% Funded Ratio on June 30, 2008, $2.2 million was not funded.
58% Funded Ratio on October 31, 2008, $2.780 million was not funded.
Using Actuarial Accrued Liability (AAL)
Asset value was $3 billion on June 30, 2005, but liability was $4.6 billion.
Asset Value was $4 billion on June 30, 2006, but liability was $5.2 billion.
Asset Value was $4.4 billion on June 30, 2007, but liability was $5.6 billion.
Asset Value was $4.2 billion on June 30, 2008, but liability was $6.4 billion.
Asset Value was $3.78 billion on October 31, 2008, but liability was $6.56
billion.
Alternate method:
Using the Present Value of Benefits (PVB)
Asset value was $3 billion on June 30, 2005, but PVB was $6 billion.
Asset value was $4 billion on June 30, 2006, but PVB was $6.5 billion.
Asset value was $4.4 billion on June 30, 2007, but PVB was $6.8 billion.
Asset value was $4.2 billion on June 30, 2008, but PVB was $7.7 billion
Asset value was $3.78 billion on October 31, 2008, but PVB was $7.82 billion.
Using Present Value of Benefits (PVB)
50% Funded Ratio on June 30, 2005, $3 billion not funded (UPVB).
62% Funded Ratio on June 30, 2005, $2.5 billion not funded.
65% Funded Ratio on June 30, 2006, $2.4 billion not funded.
55% Funded Ratio on June 30, 2007, $3.5 billion not funded.
48% Funded Ratio on October 31, 2008, $4.04 billion not funded.
PENSION OBLIGATION BONDS
Scott Peters asked about reducing the debt on the unfunded liability by issuing
pension obligation bonds or POBs which may carry a
lower interest rate than SDCERS' assumed rate of return, currently 7.75%.
Those POBs must go to a vote of the people according
to an appellate court decision, Aguirre reported to this special Budget
Committee. Aguirre had refused to sign off on the Council issuing a POB in the
past.
(The Council may try again with the
SDCERS DECLINED TO ATTEND THIS MEETING
Goldstone talked with SDCERS instead and reported for SDCERS.
It was a concern of the City Attorney that the Council was not able to
participate in a discussion with SDCERS regarding what will be disclosed about
the pension system in the Water Bond. (Especially since the last
public bond resulted in the SEC arriving and Enron by the Sea.)
SDCERS' CEO/Administer, David Wescoe sent a message
saying he would come at a later date with SDCERS actuary, Cheiron
to answer questions. He declined because the City had already paid the 2009 ARC
to SDCERS in July 2008 and he believed that this meeting was about cuts to the
City's 2008-9 budget. The Mayor, in the meantime,
expanded this meeting to a five year budget plan.
Donna Frye said she knew Wescoe was watching on TV
and said "Hi David", adding the Council always receives a letter from
him. She added, "I miss him so much".
Can the Council issue a summons, asked Donna. Aguirre
pointed out that since SDCERS is independent and the Council cannot control
them, the Council's option was to suspend SDCERS' administrative expenses (not
part of the trust?) and they would show up.
ELIMINATION OF DROP?
Esuchanko was asked to report if DROP is cost neutral
the next time he comes.
Donna Frye wants to know if DROP accounts are in compliance with the Muni Code
by being cost neutral. Goldstone said they were neutral when SDCERS' investment
of DROP funds were earning more than SDCERS' assumed rate of return. Esuchanko has reported DROP was not cost neutral in the
past. (At the last SDCERS Board meeting, Cheiron
noted that earlier retirements, etc. resulted in DROP costing the City higher
ARC payments.)
Frye said she had been unsuccessful getting DROP docketed for discussion.
Peters later explained that a discussion about DROP belonged in Closed Session
as it would reduce benefits if DROP was eliminated.
CUTS FOR UNCLASSIFIED EMPLOYEES?
Tony Young asked Goldstone if it was truth that City Directors receive 80 hours
of leave over what General Employees earn. Later Peters suggested that
executive pay is part of the mix, some contribution from the top would be
appropriate.
NEXT BUDGET REVIEW MEETING is November 19, 2008 from 2pm to 5pm, but because of
the amount of information to review, the public should not expect a vote then.
The Council is asking what will be the impact of pulling money from CCDC's projects to pay for Pet Co Park bonds. They asked
the Mayor's office to check on charging for parking at the beaches and Zoo or
borrowing from funds with reserves, etc.? Ms. Frye found it illogical to close
beach toilets for the winter. Options are limited for using volunteer and
non-profit groups due to the established managed competition process hindering
the Mayor.
WHAT NEXT:
· On November 13, 2008, the San Diego Union Tribune's front page article
"Pension shortfall has grown to $2.7 billion, analysis says",
"Mayor Jerry Sanders said he will now ask city labor unions for major
concessions, including delaying or scrapping benefits."
· On November 10th, Aguirre reported a tentative ruling to set aside the
under-paid purchases of service. SDCERS, he said, should not have passed this
debt on to the City. He explained that the rates for purchase of service had
not been increased by SDCERS when higher benefit structures went into effect.
The judge in the case must still make a final ruling. Scott Peters asked that
the final ruling be added to the City's CAFR. Mr. Levin said he will review the
necessity of that with the
· Impact of the down market, drove the need for SDCERS to disclose financial
information for future bond buyers. Donna Frye asked to have it disclosed that
the Disclosure Practices Working Group excludes Council, even to seeing their
agendas.
· Also at the November 10th discussion of necessary disclosures, Goldstone
noted that we are going into a new era of what the market will do, and he said
he will keep the Council apprised of SDCERS' monthly balance. The portfolio mix
is not more aggressive than other plans, given the long term, he evaluated. It
may not rise to a re-organization, he added.
· Donna Frye noted that SDCERS portfolio is listed on page 8 of the City's CAFR
for June 30, 2007.
· Will Goldsmith see lack of disclosures, benefits, pension obligation bonds
without a vote of the people, etc, as less illegal than Aguirre?
Goldsmith has agreed to reduce supplementary positions at the City Attorney's
office and bring that department, which is not under the Mayor's authority,
back to the budget. He also promised to cut 10%.